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Funds Roll the Dice

They're increasingly using the 'Monte Carlo' statistical process in financial planning.

The race for your retirement dollars is getting more competitive.

As I predicted in

The Savage Number - How Much Money Do You Need to Retire?

, the mutual fund industry has embraced the concept of Monte Carlo modeling as part of financial planning. This week, fund giant


is upping the ante by debuting a new service based on the system.

While "Monte Carlo" brings gambling to mind, the reality is quite the opposite. Monte Carlo modeling is the name given to a statistical process that simulates multiple variables to get a range of probable results. These results are far better than using historic averages to make decisions because real life is never average.

If, for example, your retirement withdrawals start in a bear market, your early withdrawals could deplete your retirement funds so that you run out of money before later bull market years can grow your portfolio. To calculate the probabilities of that occurrence, you need to use Monte Carlo modeling.

This modeling can be used while you're still working and contributing to tell you how much money you need to save and to give advice about how to diversify your investments to meet your goals.

And as you start to plan your retirement withdrawals, Monte Carlo simulations are especially useful. You can get specific advice on withdrawal rates, as well as continued investment-diversification advice during the withdrawal period.

Monte Carlo Matchup

As financial services firms juggle for position in this environment, their first step seems to be finding a way around using the actual term Monte Carlo, which was created back in the 1940s by scientists modeling the creation of the atom bomb. Fearing the name itself would be a bomb, you'll see financial firms refer to their services by more palatable names.

For example,


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calls its service "Envision" -- certainly a more encouraging process, but one that uses the most sophisticated Monte Carlo modeling tools. Financial advisers on a

Morgan Stanley

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team call their process a "Retirement Design Blueprint," also a euphemism for Monte Carlo.


calls its modeling process "time pathing," while Fidelity avoids naming it anything but a "tool" to help you estimate and stay on track.


T. Rowe Price

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, one of the earliest providers, comes right out and says "the analysis we perform to provide you with a recommended retirement strategy relies on sophisticated computer modeling known as a 'Monte Carlo' analysis."

To do serious Monte Carlo modeling, you are likely to need personalized advice to implement a strategy. Major no-load mutual fund companies, however, are moving in a Web-based direction. So here's an updated comparison of the offerings at fund giants Fidelity, Vanguard and T. Rowe Price.


Fidelity is the world's biggest mutual fund firm, and it's constantly enhancing its retirement plan offerings. All of its Monte Carlo services are free and Web based.

Starting Monday, Fidelity will offer "myPlan Snapshot" -- a very short and graphics based tool that requires you to answer just five questions to give you an instant read on whether you're close to reaching your retirement goals. You can move "sliders" to visualize the impact on reaching your goal if you save more, work longer or take more investment risk.

If you want to actually develop a better plan of saving and investing, you can use Fidelity's "myPlan Retirement Quick Check" -- a process on the company's Web site that takes about a half-hour to complete. It uses a simplified version of Monte Carlo modeling to give you an analysis of your current situation, suggest how much more you need to save and create a model asset-allocation portfolio.

The third facet of the Fidelity program is geared toward those approaching retirement within a few years. The "Fidelity Retirement Income Advantage" program uses Monte Carlo to guide you to an investment and withdrawal strategy designed to make your money last your lifetime. The firm also offers an income-management account designed to keep you on track with withdrawals and investments.

T. Rowe Price

T. Rowe Price has long been the leader in Monte Carlo modeling, first offering its service for retirement-withdrawal planning in an inexpensive format back in 1999. Now the firm has extended its coverage to provide modeling for diversification during the "accumulation" period when you're working, through the transition into retirement and throughout the retirement-withdrawal period.

The firm's fee is a flat $250 (which will be waived if you bring $100,000 in assets to invest in their funds). But you don't have to use T. Rowe Price funds to get its advice on diversification, savings rates or withdrawal rates.

The fee includes an annual planning checkup in future years to make sure you're staying on track. You'll speak over the telephone with a Certified Financial Planner who will help assess your situation, your goals, and intangibles like your risk tolerance -- and then help you decide on an investment or withdrawal strategy based on the probabilities created by the Monte Carlo modeling.


Vanguard is noted for its low-cost mutual funds, which save big money over the years in annual fees. But its Vanguard Financial Planning service is more costly than the other two companies. The service, which uses the "time pathing" variation of Monte Carlo modeling, costs nothing if you have $250,000 in assets with Vanguard, or are willing to move $100,000 in new money to a Vanguard account. Otherwise, you'll pay a steep $1,000 fee. Vanguard points out, however, that its funds have the lowest expense ratios and says that in the long run, its service is quite economical.

Vanguard has partnered with online investment adviser Financial Engines to provide a tool to help people decide if they're accumulating enough money -- and get advice in allocating their investments among fund choices. For the withdrawal phase of retirement, Vanguard offers a personalized consultation with a Certified Financial Planner along with its "time pathing" modeling service

It would be a fascinating journalistic endeavor to create a model portfolio based on the investment advice given by each company. The big problem is that we wouldn't know the results for 30 or 40 years! There's no way to know the winner until it's too late to change direction.

Even so, it's far better to pick one of these providers, develop a plan and stick to it than to put your head in the sand and just hope you're saving enough, investing properly and withdrawing appropriately. And that's The Savage Truth. has a revenue-sharing relationship with Traders' Library under which it receives a portion of the revenue from Traders' Library purchases by customers directed there from

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage?s personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald?s and Pennzoil.